Benefits and Risks of Trading Forex! Must Read This Article!

Benefits and Risks of Trading Forex

Benefits Associated with Forex Trading

Cash forex trading offers many unique advantages compared to trading other financial instruments:

24-Hour Market Action
The forex currency markets are a 24-hour marketplace, starting from 5 p.m. ET Sunday to 5 p.m. ET on Friday. This gives you the flexibility to trade forex full-time or part-time, whenever your schedule or lifestyle permits.
Liquidity
As the largest markets in the world, the cash forex markets offer excellent liquidity at all hours of the trading day, unlike many other 24-hour markets. This means you can trade large amounts of volume into and out of the forex markets with minimal market impact.
Leverage 
Cash forex trading allows U.S. participants to leverage up to 50 times their account value on most major forex pairs, while minor pairs offer 20 to 1 margin. These leverage amounts may change or may not be available at all times. For example, with 50:1 leverage, you may control 100,000 units of the euro quoted at $1.3000, using only $2,600. Remember that while leverage can help build profits quickly, it can also produce large catastrophic losses quickly. For international TradeStation clients, leverage amounts of up to 400:1 are available across all currency pairs.
Trading Opportunities
In addition to technical trading, the forex markets offer unique opportunities to trade fundamental changes in economies around the world. Economic changes and developments that directly affect the currency pairs are tracked through a monthly calendar of events occurring in major countries around the world. Most of the fundamental developments in the major economies have sharp impacts on the markets during the release of data and drive longer-term trends. Among the economic indicators that affect the markets are GDP, employment rates, and interest rates.

Risks Associated with Forex Trading

As with all financial trading instruments, there are risks you must consider before trading cash forex:

Leverage Risk
Leverage is the mechanism by which a trader can control a large market position with a much smaller initial investment. For U.S. clients, this enables you to take positions of up to 50 times greater than the value of the initial investment for major cash forex pairs; international clients can take upwards of 400 times the account’s cash value. However, professional traders will often recommend that your open forex positions not exceed more than 10 times your total account value at any one time. In addition, sound money-management techniques suggest not risking any more than 2-3 percent of your total account value on any one trade.
Even when market conditions are relatively calm, leverage can create large gains or losses very quickly. This may cause your broker to take action to avoid a negative account balance or to avoid your account exceeding that maximum allowed margin. In either case, your broker, without prior notification, may close any or all open positions in the account to remedy the situation.
You are responsible for the risks you take and the consequences of those risks, positive and negative, on every trade you make. Because of the highly leveraged risk inherent in cash forex, forex trading may not be suitable for all traders.
Price Risk
Forex prices are quoted and charted using only the current bid price stream; there is no concept of a last price in forex.
Since the transactional cost of trading forex is tied to the bid-ask spread, it is important to understand what the normal bid-ask spread is for any pair, and what that spread means in the actual cost per trade. The bid-ask spread can also fluctuate throughout the trading day and is often a function of the liquidity of the forex pair; you may also see slightly wider bid-ask spreads in quiet market situations, especially on lightly traded forex pairs.
As in any trading market, forex prices are driven by short- and long-term supply and demand, which can cause prices to move rapidly and often erratically. Traders need to employ sound risk-management techniques on each and every trade. Using stop-loss orders can help limit the maximum exposure you will have in any given position.
Interest Rate Risk
Traditionally, if a country’s interest rates rise, its currency will normally strengthen because investors will shift their assets to that country to gain higher returns. Conversely, if a country’s interest rates fall, its currency will normally weaken as investors shift money away looking for higher returns.
Consequently, if the interest rate differential of one currency versus another increases or decreases dramatically, the exchange rate and thus forex prices may also dramatically change.

News and Economic Risk

In our global economy, news from anywhere in the world can affect the forex markets in many ways. These effects can manifest as rapid price movements or changes in trend direction or long-term outlook. It is prudent when trading either long term or short term to keep your eye on news and other factors like government reports that can affect your profitability.

Governments gather economic activity statistics and release reports almost every day. The challenge is figuring out which reports may have an effect on forex prices. Below is a short list of some of the most widely followed reports. Remember that not all countries offer every report, and it is a good idea to monitor how certain reports affect forex prices before trying to trade based on news and government reports.

Gross Domestic Product (GDP) – The sum of all goods and services produced in a country by both domestic and foreign companies. Increasing GDP indicates a growing economy.
Industrial Production – The change in production or capacity of the nation's factories, mines and utilities. Increasing production generally indicates a growing economy.
Consumer Price Index (CPI) – A measure of the average price level paid by consumers. Increasing CPI may indicate a growing economy. Changes in CPI can also affect nominal interest rates.
Non-Farm Payrolls – The number of new jobs created by the economy during the previous month and the percentage of workers seeking employment who remain unemployed. Increasing employment generally indicates a growing economy.

Operational Risk

Brokers face operational risk as they transact their daily business activities.  Some of these risks arise as internal procedures, human resources, organizational structure, technology, etc.  Although they do not impose a risk to the market system as a whole, they could prevent you from monitoring positions or placing orders.  Forex traders should always maintain backup procedures in case the Internet or power fails.